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Trouble Brewing for Green Mountain Coffee Roasters

Solution Id Length Case Author Case Publisher
2860 1516 Words (6 Pages) Suraj Srinivasan, Michael Norris Harvard Business School : 113035
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The case revolves around Green Mountain Coffee Roasters. It started as a small café in 1981 and then became the market leader in 2010. Its business model centers around a razor-razor blade strategy in which its Keurig brewers are sold at around cost, and its K cups are sold at a profit. GMCR has grown mainly through the licensing of selling of its products to similar companies and then later acquiring them.

However, despite GMCR's success, light is shed on the company’s present problems. Firstly, it has been under the scrutiny of the SEC for accounting distortions. Besides that, Einhorn- an investment guru with his own thriving mutual fund- brings to light different problems which GMCR faces- these hint at bleak prospects for GMCR. Many believe in Einhorn blindly, and because of that, the company's stock price takes a hit- nonetheless, many still believe that the company has bright prospects ahead.

Following questions are answered in this case study solution:

  1. Why do you think the stock market is valuing Green Mountain so high?

  2. Suppose you are a private investor in GMCR, and you receive the presentation of Einhorn on 10/17/2011. Which of Einhorn's concerns are the most important for you?

  3. Assess how the future is going to look based on the problems Einhorn presented. Be as specific as you can be, explaining how these problems influence the value of the stock.

Case Study Questions Answers

1. Why do you think the stock market is valuing Green Mountain so high?

Green Mountain is the market leader and has more than 80% market share. In the recent past, it has been rapidly growing with its ever-growing licensees- many of which are big names like Starbucks and Gloria Jean’s, and it seems to have the financial muscle to acquire companies- it has acquired many companies in the recent past- that too reportedly at more than its face value. The fact that many licensees are looking to be affiliated with them is evidence of the quality and value of GMCR’s products. This also gives GMCR a lot of retail shelf space. Besides this, the company’s fixed assets have increased rapidly since 2007, and this, too, is evidence of the ever-increasing demand for GMCR’s products. Many also believe that GMCR is fair most of the time and is not involved in anything wrong or illegal. This is evidenced by many analysts issuing reports in favor of GMCR after the SEC had probed into GMCR’s recognition of revenue policies with one of its vendors.

In addition to all this, many believe that GMCR is going to grow further because of favorable market conditions. According to the bulls' estimates, around 7.5 million to 10.5 million households already have a Keurig brewer- therefore, it is expected that given them drinking 2 cups of coffee daily, GMCR should be able to sell at least 15.5 billion K-cups daily.

Along with all this, the Board of Directors seem to bring a diverse set of skills to the company, and many seem well accomplished in their respective fields with their wealth of experience. With strong and qualified leadership at the helm, many will have faith that the direction the company will take will most probably be a good one.

Its retained earnings have also increased over time, and this shows that the company has funds to invest in growth opportunities.

2. Suppose you are a private investor in GMCR, and you received the presentation of Einhorn on 10/17/2011. Which of Einhorn's concerns are the most important for you?

The concern related to channel stuffing was the most important one because of its nature. According to the case, all frauds that Einhorn has pointed out have turned out to be true, and if this turns out to be the case for GMCR, then its stock price is going to fall further.

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